Background note on Supply Chain management In Automotive Industry

Auto SCM India 2006, Chennai


54 500 2 .42% during this period. The industry has been growing at CAGR of 16. new technology. In terms of production.33% from 2001-02 to 2005-06 in terms of production. mopeds production and sales have declined at CAGR 2.56 8467.55% from 2001-02 to 2005-06. manufacturing industry (namely textile. which has increased purchasing capacity of the people in the country.Supply Chain Management Automobile Industry in the major reasons for surge in demand for automobiles in India. has increased at CAGR of 24.4% in 2005-06. Exports of motorcycle segment have registered highest annual growth rate of 61. per capita personal disposable income has gone up by around 8%. Exports on a roll The significant development in Indian automobile sector is the outstanding growth of its exports.2: Export Trend in Indian Automobiles (‘000 units) 900 800 700 806. which is lowering cost of ownership.22 8000 6279. while passenger vehicles have registered a CAGR of 18. commercial vehicles have registered a CAGR of 24. During 2001-02.97 6000 5316.30 4000 2000 0 2001-02 2002-03 2003-04 2004-05 2005-06 7243. low car penetration in the country and most importantly growing steel production in the country. This is easy to understand because the per capita disposable income of the people has gone up remarkably. In addition.92 300 184. Over the last five years.35% during the above-mentioned period.93% and 5% respectively. total exports of automobile sector has gone up at CAGR of 44. This has clearly indicated that Indian automobile sector is going global. shorter replacement cycles. wide variety and easily available financing options are also some of Chart-1: Automobile Production Trend in India (‘000 units) 12000 10000 9735. Other factors have also contributed to this high growth in Indian automobile sector. Booming IT/ITES sector.49 600 Overview of Indian automobile and auto components industry Indian automobile industry is riding high with overwhelming economic growth rate of 8.68 307. in particular. whereas total sales of passenger cars in domestic market have increased at CAGR of 14.02%. These include lowering age of first car users. The commercial vehicle segment. Chart.31 200 100 0 2001-02 2002-03 2003-04 2004-05 2005-06 Source: SIAM Source: SIAM 629.56%. pharmaceutical and engineering) and real estate have contributed to this high growth in automobile industry in the country.27% from 2001-02 to 2005-06. There is a declining trend in mopeds production as well as in sales in the domestic market.24%. rising duel income families.85 400 479. From 2001-02 to 2005-06. Domestic sales have grown at CAGR of 14.

47 5.2002.5% and others at 0. During 200506. low penetration.6% (chart 4).3% Growth of automobile industry has driven India’s auto components industry as well.2003.6 0.73 8.2 1 0.8 1. Europe accounts for 31% of total exports of auto Chart-4: Exports of Auto Components (US$bn) 2 1. From 2001-02 to 3 .8 1.2001. to reduce costs.8 0. 2005-06. Exports of Indian automotive components growing at CAGR of 24.7 2000.200501 02 03 04 05 06 Source: ACMA India components. Chart-3: Production of auto components in India (US$bn) 12 10 10 8 6 3. Oceania at 1. Middle East at 10%.97 4 2 0 200001 200102 200203 200304 200405 200506 4. companies are forced to source more components from low-cost countries like India. India is emerging as a major destination for global automobile and auto component MNC’s for investments. Growing IT capability for design.6 0. electrical parts (9%) and others (7%). Major advantages that India has over others include huge population. and low production costs. body chassis (12%). drive transmission and steering (19%).6 Auto components industry is growing at CAGR of 20. exports of three-wheelers have grown at CAGR of 49. Global automobile manufacturers are under tremendous pressures to innovate their manufacturing process and at the same time.4 1. In addition.33%. they must not only develop new features to strengthen their customer requirements but also follow the environmental and safety standards.3% from 2000-01 to 2005-06 in terms of production.2 0 1. particularly in the African countries.4 0.4 1 0.There is a considerable rise in demand for Indian three-wheelers in global market. equipments (10%). Indian auto components industry has increased at CAGR 20.5%.8 0.43 6. followed by the US at 26%. infrastructural development.6 1.6% Exports of auto components from India have registered an outstanding growth rates over the last couple of years. It is expected to reach US$18. Asia at 16%.7 billion in 2004-05.2004. development and simulation has also attributed to this high growth in production of auto components in India. production of automotive components was worth of US$10 billion from US$8. As a result. huge skilled human-power. the base price of a car is expected to remain same over the next decade. India’s Competitive Edge Global automobile manufacturers are consistently streamlining their business process by outsourcing their non-core activities to low-cost countries like India.7 billion by 2009 and US$40 billion by 2014. Africa at 10%. From 2001-02 to 2005-06. suspension and braking parts (12%). In view of the present global competitiveness. Source: ACMA India Production of auto components in India comprises engine parts (31%). exports of auto components have shot up at CAGR of 24.

India’s strength is in its design. Several automobile manufacturers have already set up their auto component facilities in India. and capital engineering—its excellent manufacturing history and good education system. Role of SCM in Automotive Industry According to the Council of Logistics Management Supply Chain Management. finished goods and related information from point-of-order to point-of-consumption. which helps in reducing costs. It took more than four years to develop similar system with suppliers in the other low-cost countries. In India. with its skilled engineers. India has plenty of scope to garner this potential. India's auto components industry has the major advantage of enormous skills in process. in-process inventory. which are applied in Western countries’ factories.According to Mckinsey. “the process of planning. According to the management consulting firm. India’s auto component sector is becoming more mature and achieving greater heights. India has the potential to notch this opportunity and reach up to US$25 billion to emerge as major sourcing destinations along with China. for the purpose of conforming to customer requirements as efficiently as possible”. implementing and controlling efficient and cost effective flow of materials. there are 456 auto component companies having ISO 9000 certification. In case of product engineering. can reduce the overall manufacturing cost of some components by up to 20%. Mexico and Thailand. redesign of the Maruti Alto’s steering system has cut down its weight by 15%. India’s process-engineering potential can be utilised for redesigning of manufacturing processes to make them more labour intensive and less capital intensive. 136 companies having QS-9000. Stiff competition among manufacturers will result in more mergers or acquisitions. Besides low cost. Global Automobile Market Scenario Diverse needs customer High cost due to huge R&D investment Fierce Competition M&A. an Indian supplier took six months to design a steering system for an automaker. For instance. India with its large young population and abundant skilled labour force can become a major player in the automobile sector across the world. global outsourcing of automobile and auto components would reach US$375 billion by 2015 from US$65 billion in 2002. strategic alliances among manufactures Regulations environment safety for and 4 . For example. which in turn reduces its development cost and lead times. The automobile industry has undergone significant structural and other changes in the last decade or so. The challenges automobile manufacturers and suppliers face include improving quality. India has emerged as a leading destination in the world. and 129 having ISO 14001 certification. India. multinationals can take the full advantage of its huge resources. For instance. meeting cost reduction targets and developing time to market. Given the potential of India’s automobile sector. product. In view of the present globalisation. 248 companies having TS 16949 certification. can design a product very fast. especially those in the first tier. implementation of lean production and the development of modularisation have changed the relationships between automobile assemblers (OEMs) and their suppliers. "de-automating" of the production processes. According to ACMA. which will enable the MNC’s to reduce their overall costs substantially.

the management of materials and financial information of all parties involved. data processing. SCM helps in demand forecasting. payment schedules and consignment and title ownership arrangements. position inventory properly. Supply chain management has two types of software—planning application and execution applications. Rapid surge in global sourcing of auto components has also become a challenge for manufacturers and suppliers although sourcing has reduced the cost of production substantially. in the age of e-business and global outsourcing. giving an accurate promise date. supply chain management (SCM) plays a crucial role in many of these areas. mailing o Better warehousing and transportation management o Timely and correct asset capitalisation o Credit management (customers) o Better plant maintenance o Easy access to data /information 5 . sales. Benefits of SCM and IT Quicker response – improved professional service o Timely product supplies o Accurate pricing/discounts o Reduction in billing errors – cleaner SOA o Simplified and faster payments process o Reduction in administration costs for customers/vendors o Online information (purchases. and efficient transshipment. pick. and retailers to blend the demand chain with the supply chain. printing. logistics and distribution companies. and increasing focus on boosting efficiencies in manufacturing and supply chain. execution software determines the physical status of goods. SCM makes a world of difference to the manufacturers by maintaining a minimal finished goods inventory. financials) o Elimination of reconciliation of accounts/error processing o Reduction in accounting cycle times o Less duplication of job – utilisation of human-power in value adding roles o Reduction in paper flow. Supply chain management flow is divided into: a) Product flow b) Information flow c) Finance flow The product flow is nothing but movement of goods from supplier to customers and also in case of any customer returns or service requirements. inventory. SCM is a best-in-class. While planning application is utilised to determine the best way to fill the order. high-performance solution which can be utilised by the world's leading automobile manufacturer. Auto component manufacturers and all tiers of the supply chain have immense opportunities to enhance their entire supply chain process with the successful implementation of SCM solution. sourcing and manufacturing the right goods. The information flow covers updating the status of the delivery as well as sharing information between suppliers and manufacturers. pack. most importantly. taking an order. The finance flow encompasses credit terms. innovative sales and marketing approaches.All this is driving the organisations towards greater product differentiation using cuttingedge R&D. Hence.

packaging for 11%. Tier I suppliers. Currently. accelerates information gathering and speeds up communication channels among buyers and sellers. The companies have implemented this e-sourcing for procurement of high-value commodities. manufacturers and distributors. The main reasons for this surge in spending on IT by manufacturing industry are: a) Indian manufacturing companies which are Tier 1 or Tier 2 suppliers to OEMs in India or abroad. According to CMIE. more global suppliers have participated compared to the traditional strategic sourcing process. In India.Benefits to Shareholders o Accurate and transparent information o Good controls over receivables o Better inventory management o Improved reporting of accounts o Audit trail o Branding Kirloskar Group saved Rs7 crore with reverse auction. 400 300 200 100 0 2001 2002 2003 2004 2005* *2005 Cygnus Estimates Source: IDC. manufacturing and automotive sectors have been the leaders in implementing SCM solutions in the country. sub-contractors and distributors during product development and process manufacturing. Around 70% of Indian software houses have expertise in SCM. the essence of SCM solution lies in coordinating the flow of information and goods between the customers and the network of suppliers. Chart-5: SCM Market Size in India (Rs cr) 800 700 600 500 Potential and Market Size of SCM in India SCM solution market has been making inroads in India and it is being accepted widely by many industry sectors in the country. losses for 14%. which helped them to reorganise the purchasing process and supported the aggregated buying across business units with the help of Internet-based tools or B2C Internet portals. Several measures were undertaken by Indian companies to improve their supply chain. It forms around 14% of the country’s total GDP. particularly manufacturing and retail where inventory carrying cost is very high. IT spending by the manufacturing sector in India. b) The manufacturing sector wants to improve operational efficiency 6 . Several automobile manufacturers in India have taken proactive measures to control their logistics cost and improve customer services. there is no dearth of SCM solutions in the country.000 crore of industry sector is tied up due to high inventories. For instance. logistics cost is very high as compared to other developed countries. Cygnus Research In India. to reduce time-to-market and product life cycles. Interestingly. With the use of Internet. some of the automobile manufacturing companies have adopted esourcing. over Rs100. Hence. and others for 6%. Tata Motors has saved Rs22 crore on transactions worth Rs362 crore in 2004. The process reduces time spent on negotiating. handling and warehousing for 9%. there has been a growing trend of realisation of supply chain optimisation in India. is growing between 30 to 40% per annum. inventory for 25%. Transportation accounts for 35%. put pressure on manufacturers to integrate with OEMs of both India and other MNCs. which accounts for 10% of the domestic IT market.

Indian IT Industry is growing rapidly and in 2005-06. There is a huge scope for Indian automobile and auto component manufacturers to reduce their logistics costs with the implementation of SCM solutions. which is implementing SCM. what level of integration is required and what partnership can be implemented? IT and Decision Support System– This is another important challenge for SCM. information sharing and operational planning are crucial for successfully integrated supply chain.5%. What data should be transferred with its significance and most importantly.5% and the domestic market constituted the remaining 24. o Challenges in Supply Chain Management In view of the diverse business activities. Determination of production requirements and inventory levels at the vendor’s facility for each product and development of transportation flows between these facilities to the warehouses in a best possible way to reduce total production. o Supply chain integration and strategic partnering – In SCM. IT service (excluding ITES) industry witnessed an excellent growth rate around 30%. the supply chain managers are facing various external challenges driven by customer Training – It is important for every company. 7 . who are going to use the system. Implementation of supply chain solution would streamline their business process. Understanding the market. out of which software export accounted Chart-6: Sector-wise usage of IT in India requirements and intense competition. c) dwindling product lifecycle. Small of f ice/ Home Educat ion Ener gy Gover nment Banking/ Finance IT/ Telecom Manuf act ur ing 1% 1 1% 1 6% 1 4% 21 % 22% 1 5% 5% 1 0% 1 5% 20% 25% o 0% Source: Cygnus Research for over 75. risk. rapid customisation of products and most importantly growing globalisation led to a spurt in IT spending (chart 6) by the manufacturing sector in India. Companies must leverage extensive training to their employees. The manufacturers would be able to deliver their products faster to their suppliers and reduce the inventory carrying costs. Today.and capital productivity by reducing fixed and variable costs. inventory and transportation costs with fulfilment of service level requirements. SCM is driven by the scope and opportunities appearing due to abundance of data and the savings which can be achieved through efficient analysis of these data. Today. today’s supply chain process is very critical for success in current business scenario. in particular has made the business easier and cheaper for manufacturers to coordinate their business activities with their suppliers. and spend analysis and applying strategic sourcing methodologies are important. The major challenges are: o Network Planning – This is one of the most important issues for SCM. But the challenges are – what type of information would be shared. what infrastructure is required internally and between its partners is very important. and how this information will be used. Proliferation of Internet.

000 crore in 2005-06. The company has established a strong web component for its 400 plus dealers to collect sales information and 800 suppliers to submit SCM planning information and material requirement planning (MRP) schedules.Success story Ashok Leyland. The company. The company has to spend more money on raw materials but cannot increase the prices due to high competition. Ashok Leyland. The company exports tractors to the US.Best Practices / Case Study Success story Mahindra of Mahindra and Mahindra and Mahindra (M&M). cost reduction was very important. The company has set up its assembly/manufacturing facilities at multiple locations. the company needed an integrated solution.000 units.029 units. buses. achieving a growth rate of 30% against the previous year. Now.000 by maintaining healthy customer delivery response. special application vehicles and engines.500 to 2. working capital (inventory).000 tractors per annum. therefore.500.085 vehicles out of which it has exported 4. Thus. Replenishment lead times. In view of global competitiveness. operational efficiency. crossing millions more than 40 countries in the world. In the 8 . which could link all plants to optimise total costs. is one of the largest private sector companies in India. had sales over Rs6. The company has faced stiff competition after the country’s economic reform in 1990s. the company expects to reduce its dealer inventory further to 4. During 2005-06.000 and company stock to 3. The company started with dealer stock of 12. under the flagship of Mahindra Group. producing around 100. and respond quickly to customer requirements. were around 52 days. Hence. The division is the third largest producer of tractors in the world. Ashok Leyland is a part of Hinduja Group. implemented SCM solution in the year 2000 to streamline its business process. which has increased the complexity of the entire supply and operations. It is also one of the largest automobile and auto component companies in India. Successful implementation of SCM has helped M&M by reducing its inventory by more than 50% and the company expects to maintain similar inventory level.879 units. With the fuller implementation of SCM. The company was facing a major challenge in its supply chain of products across the country as well as overseas market.000 tractors and company stock from 3. African countries. which helped in optimising the logistics and manufacturing operations to improve margin and minimised costs by enabling quick customer requirements. which cover planning and execution lead times. SCM was the only solution to keep its margin healthy – minimising costs by reducing the cost of production. one of the largest private companies in the country. and the cost of lost sales. the company sold total 85. But the change in business model and implementation of pull-based replenishment enables the company to minimise its dealer stock to 6. In 2005-06. the company has to develop new products and varieties in existing products to compete with world-class offerings. and several countries of South-East Asia. For M&M. before the SCM project began. which directly impacts lives of around 6m farmers in the country. M&M Farm equipment unit is one of the major two operating divisions of M&M. Information flows from the company to its supplier in terms of MRPderived schedules.000 tractors and company stock of 7. SCM solution has enabled a pull-based replenishment. The company offers a world-class range of trucks. the company produced total 65. logistics. Mahindra’s farm equipment division plays an important role in the country’s mechanisation of agriculture. the replenishment time has been reduced to 19 days. Thus.

global market leader. There had been a steep rise in steel prices and copper prices. vendor base rationalisation. tiering for ease of fitment. improved field performance. logistics initiatives. The company was facing the huge task of integrating its entire supply chain and at the same time it had to reduce its costs. The project ‘Oscars Inbound’ included supplier partnership. inventory. while cluster formation included 5S adherence-mistake proofing. and improve customer satisfaction.system buying and reduction in paper work o Vendor tierisation included economies of scale. Partnership gains include vendor consolidation under Tier-I. e-sourcing and global sourcing. total cost management. continuous technological upgradation of products without in-house investment.domestic market. rationalization of supplier base. vendor improvement programme for continuous improvement. design. improved field performance. JIT supplies and world-class technology. inventory optimisation through JIT and LCL. system buying.776 units. the company has sold total 56. shorter development lead time. value engineering and cost reduction. The gains from ‘Oscars Inbound’ are given below: o Supplier partnership covers engineering and technical support. o Total cost management included various cost management initiatives such as daily management. process control. testing capabilities. system supplier. Rising raw material cost was a serious concern for the company. Status o Vendor base rationalisation 00-01 01-02 0203 738 0304 612 0405 400 Vendor Base ISO/QS certified Self certified vendors 1017 950 245 281 364 382 400 210 240 260 290 350 JIT % 69 of PO Value LCL % 5 of PO Value MRP % 26 of PO Value 72 74 77 82 5 6 7 9 23 20 16 9 o Gains from source reduction includes pricing on volumes. Therefore. Ashok Leyland decided to streamline its supply chain process and the company started its SCM project ‘Oscars’ to optimise its supply chain and rationalise its sources. tiering of suppliers and cluster information. global availability of spares. technology and 9 . improvement in quality and reliability. inventory efficiency through JIT supplies and humanpower rationalisation. process improvements leading to self certification o Inventory level has reduced from 23 days to 18 days.

Therefore.5 car per thousand population. Indian automobile industry is expected to grow at CAGR of 15% over the next five years. Total savings was 3% on total operating cost. increasing efficiency and minimising costs.25 crore per annum Stores outsourcing covered activities outsourced to 4PL service providers and the service are– receipt accounting/documentation. Kanban pull from satellite warehouses. 10 . efficiency in supply will be critical for India’s automobile success. The Indian economy is now gaining momentum in the world of free trade and liberal movements of goods and services between countries. issue accounting. introducing best sourcing practices. Low cost of manufacturing and conducive government support have been the major drivers for foreign companies investing in India. perpetual inventory and reverse logistics for pallets. enhancement of truckturn around. According to Planning Commission of India. India’s large young population. improving bottomline of the value chain. higher GDP growth.o o o capacity. binning and debinning. identification of cost-competitive sources. India has become a favourable destination for foreign companies to establish their facilities and form alliances with domestic companies. E-sourcing included global benchmarking. load. space and route optimisation benefiting entire logistics process. and most importantly per capita passenger car penetration is low at 8. All these services have saved 42 man days. All these activities have saved 11. which has benefited the company by saving over Rs1. Logistics initiative included transporter-based rationalisation. gain through bidding.5% of total material cost Conclusion Indian automobile and auto components industry is on a roll and there is an immense scope for management for enhancing the supply chain of the sector. which creates great opportunity for industry players to offer an affordable four-wheeler alternative to the two-wheeler customers.

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